Change streamlines waiting time for bank response on short sales

WASHINGTON -- For the estimated 11 million homeowners burdened with an underwater mortgage, a federal policy change could be good news: Starting in June, those seeking a short sale to avoid foreclosure may not have to wait for months to hear back from the bank after an offer from a potential purchaser is submitted.

If the loan is owned or securitized by either of the dominant conventional mortgage market players -- Fannie Mae or Freddie Mac -- a response can be expected within 30 business days, with a final decision no later than 60 days.

If the bank doesn't respond during the first 30 days, it will be required to send weekly updates specifying where the holdups are and when they are likely to be resolved.

The mandatory timelines are being imposed by the Federal Housing Finance Agency, the regulatory overseer of Fannie and Freddie in conservatorship. Short sales are an important alternative to foreclosure and involve the lender or loan servicer agreeing to accept less than the full amount owed by the borrower.

Short sales are turning into a mainstay of the real estate market. According to a report from the foreclosure data firm RealtyTrac, they jumped by 33 percent in January compared with the same month the year before. In 12 states, including California, Arizona, Colorado, Florida, New York, and New Jersey, more short sales than sales of foreclosed properties were recorded during January.

Regulators say the trend is welcome, but the time required to complete short sales is far too long. The 30-day and 60-day mandates address that point, but regulators promise a series of additional steps during the coming months to speed transactions. They include clearer guidelines on borrower eligibility, property valuations, compensation for lenders holding second liens, and mortgage insurance issues.

Erik Berry, a broker in Sacramento, Calif., who specializes in short sales, says short sales that his firm handles take an average of "about six months" from start to finish on Fannie-Freddie loans. But FHA transactions -- which will not be affected by the new regulations -- average much longer, and sometimes drag on for a year.

Mr. Berry said in an interview that in some cases, banks switch personnel and negotiators five or six times over the course of a short sale. "You're dealing with one person one day and they say, 'Don't worry, everything's fine,' then suddenly they're gone and you never hear from them again," leaving the deal stalled for weeks.

Matt Battiata, a broker in Del Mar, Calif., whose company handles hundreds of short sales a year, said a reliable, 60-day decision deadline for responses to offers will be helpful -- 30 days better than the 90-day average he now sees from banks -- but the whole process will still take longer than traditional sales.

For clients seeking to do short sales today, Mr. Battiata estimates five to six months from offer to closing. After June, assuming the new federal rules and penalties work, the estimate might be cut by only a month.

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